Opinion: Are stocks a good buy or is it goodbye

It’s nail-biting time on Wall Street and with good reason: Investors are growing extremely nervous about lots of things but especially about equities.

For starters, let’s take the fact that for the past five years, stock prices have been climbing much faster than overall economic growth. Furthermore, no matter how fast the U.S. economy winds up growing over the rest of this year, it will still not be able to catch up with stocks — unless the market crashes.

At midweek, the Dow
DJIA, +0.72%
had given up all of this year’s gains and then some — a big drop but far from a crash. On Wednesday, the Dow closed more than 3% below the end of last year. At its peak in September the Dow was more than 13% higher.

Last year the Dow shot up by more than 26%. If you go back to the end of 2009, it’s up by a thumping 60%!

Meanwhile, the economy has been chugging along in low gear. So far this year the nation’s inflation-adjusted gross domestic product is up by 0.6%, after climbing 3.2% last year and 10% since 2009.

By this measure alone the market is overvalued. Add in the fact that there has been no correction of 10% or more in at least 35 months and this overvaluation becomes more apparent.

As I pointed out in my column of Sept. 2, stocks have corrected on average every 12 months. And correction or not, the undeniable fact is that the current bull market is the longest since the crash of 1929.

Valuations are well above average. According to market economist and historian Robert J. Schiller, since 1881 the 10-year price-to-earnings ratio has been this high only three times: 1929, 1999 and 2007.

MarketWatch

The Shiller price to earnings ratio signals an overvalued market.

There is no denying that investors have gotten very nervous lately. Last week alone the market reversed course several times and by triple digit amounts each time. This behavior has continued into this week — if not at closing than certainly during intraday trading.

Trading in stocks has become a game of musical chairs; the longer the game, the greater the likelihood that you will be out. For example, every time the Federal Reserve meets or issues a statement as it did this week, the markets hold their breath, parsing the central bank’s words with a fine-tooth comb. It’s as if the economic outlook is changing daily and needs to be monitored closely.

But the Fed has taken pains to reassure the markets that there will be no dramatic change in monetary policy over the foreseeable future. The Fed intends to stick to its previously announced plan — as long as the economy performs as predicted and no unforeseen geopolitical event occurs.

On the international front, many foreign economies are faltering and to deter this our trading partners are pushing down their currencies against the dollar in a bid to boost their exports while deterring imports. This could hurt our economy (see my column of Sept. 23).

Besides all this we are smack dab in the middle of October, arguably the worst month of the year for stocks. But then you knew that, didn’t you?

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